Qantas Annual Report

[QAN_Shareholder]

Why is the best way of structuring one part of the group with leased aircraft, and another part of the group with owned aircraft?

Part of it is narrow body v wide body aircraft. There is an active secondary market for narrow bodies and J* overwhelmingly operates narrow bodies. You would struggle to operating lease an A380.

Virgin's fleet is slightly larger than Jetstar's with the majority of aircraft also leased. Virgin's depreciation costs were just under $200m vs $17m for Jetstar. Why such a big discrepancy between two similar businesses?

Virgin have the 777s and must own plenty of their aircraft since they have $2.6bn of 'Aircraft and aeronautic related assets'.

[calogero_vizzini]

Indeed, the lease from Qantas Company to Jetstar could be done at a loss, which would therefore make Jetstar look like a more profitable arm of the business than it 'really' is - which an interpretative investor might think as something of a grower, or a great new development within the company.

Whatever done between each company, it all evens out in the consolidated group reporting. It's just a shame there isn't the full transparency some would feel they need.

[CaptainSouth]

Please explain

Not part of the annual report but in todays Sydney Morning Herald. "Qantas announced increases of up to $10 for one way domestic.....It has now increrased surcharges or fares four times in two months...The latest increase does not apply to....Jetstar.....which has resisted introducing fuel surcharges..."
If THE QANTAS GROUP purcahses all the fuel for the companies, why does mainline only suffer the higher fuel prices? Why is JQ immune from these increases?
Please enlighten me.

[Shark Patrol]

Why is JQ immune from these increases?

It's so that the Orange Cancer can continue to be the shining beacon of profitability (and hence the industrial model) for the Qantas Group. It's also because the punters who travel on Onestar are much more price conscious than their counterparts who travel on Qantas. If they raise the prices too much, the load factors will fall dramatically and (shock, horror) Jetstar may start to lose money. Can't have that happening for BB's bonus can we?

Prior to the onset of the GFC (and during the last big fuel price rise), Jetstar was purportedly hurting big time, until the fuel prices eventually came back down. So hang in there Muamar! We are all behind you!!

['holic]

Part of it is narrow body v wide body aircraft. There is an active secondary market for narrow bodies and J* overwhelmingly operates narrow bodies. You would struggle to operating lease an A380.

In that case, why do Qantas own most of their 737s? Why would Jetstar even care about the secondary market? That would be more of a concern for the leasing company, not the lessee. And once again, what is the advantage in one segment of the group purchasing aircraft to then lease them to another part of the group?

[QAN_Shareholder]

In that case, why do Qantas own most of their 737s?

Don't know, they do lease around 1/3rd I believe. LCCs generally use operating leases since they are capital constrained, there is also a tax advantage if you can't use all tax losses when expanding rapidly.

Why would Jetstar even care about the secondary market? That would be more of a concern for the leasing company, not the lessee.

It matters because it is a concern for the leasing company. If the leasing company aren't confident they can sell / re-lease the aircraft at the end of the term then they won't buy the aircraft.

what is the advantage in one segment of the group purchasing aircraft to then lease them to another part of the group?

Don't know, I don't believe it applies to much of the fleet, it could be an accounting trick, but possible that could be for some complex tax reason. Or maybe they bought them expecting to be able to put them into an operating lease structure but the market had dried up at the time.

[Back Pressure]

The purpose of auditing of a company's accounts is to determine if those accounts present a "true and fair" picture of that company's operations, and P&L.

If, as suspected by many who've contributed to this thread, there has been creative accounting, and cost-shifting etc. within Q/J*, then how could the auditors (whoever they are) have signed off on the accounts ?

Either:
. all the accounting shenanigans (assuming they have been perpetrated) are above board,
. or the auditors are incompetent (or criminal).

I'm not an auditor or accountant, and don't work in any aviation-related industry, so I have no ulterior motive here - just wondering...

BP

[breakfastburrito]

Back Pressure, this quote from QAN_shareholder may shed some light on the process of auditing:

T-Vasis, I wouldn't put much weight on auditing for ensuring the accuracy of transactions between Qantas and Jetstar. I worked as an auditor for a spell and internal transactions are way down the priority list, there is very little risk to the auditor from internal transactions being mis-stated.

However, I agree the argument that JQ is being subsidised as part of some plot to undermine QF is rather unpersuasive. The more prosaic explanation is more likely that parts of QF are uncompetitive and management are justifiably unwilling to continue to pour more cash into parts of the business that can't make a return on capital.

QAN_Shareholder 15 Feb, 2011

['holic]

Back Pressure,
I have no doubt that the report meets the required accounting standards. However, there is plenty of latitude within that framework to "adjust" the numbers as needed.
Having said that, after the way that the finance arrangements for Jetconnect and the Jetstar cadet scheme have stood up to closer scrutiny lately, anything's possible.

QAN_Shareholder,

Why would Jetstar even care about the secondary market? That would be more of a concern for the leasing company, not the lessee.

It matters because it is a concern for the leasing company. If the leasing company aren't confident they can sell / re-lease the aircraft at the end of the term then they won't buy the aircraft.

Sorry, misunderstood the intent of your original post. I think we're on the same page with that one.

Was just having a look at the leasing arrangements for the A330s. Qantas lease 10 A330s from outside leasing companies to be operated by mainline. At the same time, Jetstar also lease 6 A330s from mainline. For this arrangement to be profitable for mainline, you would expect that mainline would charge Jetstar more for their operating leases than mainline pays to the outside leasing companies. Which begs the question, why wouldn't Jetstar lease directly from the outside leasing company as opposed to Qantas mainline?

[QAN_Shareholder]

Was just having a look at the leasing arrangements for the A330s. Qantas lease 10 A330s from outside leasing companies to be operated by mainline. At the same time, Jetstar also lease 6 A330s from mainline. For this arrangement to be profitable for mainline, you would expect that mainline would charge Jetstar more for their operating leases than mainline pays to the outside leasing companies. Which begs the question, why wouldn't Jetstar lease directly from the outside leasing company as opposed to Qantas mainline?

I believe once 787s arrive the A330s go back to mainline hence some logic in being bought by Qantas.

['holic]

I believe once 787s arrive the A330s go back to mainline hence some logic in being bought by Qantas.

ok ... still not sure how this explains why Jetstar operates A330s leased from mainline. In fact, wouldn't this support the argument for mainline operating the A330s it owns? Under the current arrangement, the A330s owned and operated by mainline are transferred to Jetstar, and then returned to mainline when the 787s arrive. So in effect, the costs of transferring these aircraft (repainting, reconfiguring etc) are paid twice. If mainline had retained the aircraft they own and Jetstar has leased their A330s directly, then transferred them to mainline when the 787s arrived, the costs of transferring the aircraft would only be incurred once.

LCCs generally use operating leases since they are capital constrained, there is also a tax advantage if you can't use all tax losses when expanding rapidly.

I'd buy that argument if Jetstar was a new, startup LCC. But you'd have to agree that Jetstar are fairly well established now, not to mention that they have the backing of the mothership mainline. Also, management have repeatedly stated that they will allocate capital within the group wherever they can get the best return. So I wouldn't have thought that being capital constrained was a factor.

Cheers

[stubby jumbo]

Logic ?

QAN Shareholder........you can't seriously put LOGIC and QANTAS in the same sentence.
Here are some illogical examples:
* Closing Heavy Maintenance
*Offshoring "some" Checks?
* "Qantas Mainline and Jetstar will NEVER compete on the same routes"(Dixon 2004)
*IR led by IO (for how long ???)
*Off shore Bases
*Disengagement Policy of "Divide & Conquer" for Pilots & all Front line staff.
*777 -non choice
*Irish over Italian
*JQ Asia /Pacific

I could go on and on.

Word out of the QCA bunker though is that the Black Widow will announce her "review" in the next few weeks.

It ain't going to be pretty.

[QAN_Shareholder]

Under the current arrangement, the A330s owned and operated by mainline are transferred to Jetstar, and then returned to mainline when the 787s arrive. So in effect, the costs of transferring these aircraft (repainting, reconfiguring etc) are paid twice.

I didn't think they weren't planning on doing much reconfiguring since the J* international and mainline domestic were meant to be equivalent. Seems different now with change of mind on domestic business class.

Also, management have repeatedly stated that they will allocate capital within the group wherever they can get the best return. So I wouldn't have thought that being capital constrained was a factor.

The lack of dividend suggests that the group as a whole is capital constrained.

['holic]

I didn't think they weren't planning on doing much reconfiguring since the J* international and mainline domestic were meant to be equivalent. Seems different now with change of mind on domestic business class.

Fair enough. The main point I was trying to make was that the costs of transferring aircraft between the 2 groups appear to be doubled under the current arrangement. This is apart from questioning whether Jetstar and the Group could possibly save money by leasing aircraft from an outside company or by Jetstar owning the aircraft, as opposed to Jetstar leasing aircraft from Qantas.

The lack of dividend suggests that the group as a whole is capital constrained.

Yep, I'd agree with that in 2011. However when the A330s were given to Jetstar a few years back, the company was making record profits year after year and was paying one of the best dividends on the ASX. It's ability for generating cash was one of the major selling points to private equity, and I also seem to remember that at one stage GD was being criticised in the media for under leveraging the company. Capital definitely wasn't a problem back then.